The Third Wave: An Entrepreneur's Vision of the Future (10 page)

Of course, even when there is a desire to challenge the status quo, CEOs are often penalized for leaning too far into the future—making too many investments or taking too many risks. At PepsiCo, CEO Indra Nooyi pushed a diversification strategy, recognizing that a shift in food preferences could have
bad long-term consequences for a company known for selling sugary drinks and high-calorie snacks. But doing so caused a revolt among some shareholders, who were convinced that Nooyi’s attempt at transformation was hurting the stock price in the present. Where Nooyi survived, DuPont CEO Ellen Kullman did not. Just a day after Bloomberg Markets named her one of the most influential people in business, Kullman was forced out after a long battle with an activist shareholder who was frustrated that, among other things, the company was investing $2 billion a year in R&D.

The same kind of problem plagued Kodak. The conventional wisdom is that Kodak didn’t see digital coming. That’s just not true. In fact, the first digital camera was actually invented at Kodak in 1975 by Steven Sasson. The company was doing a lot of things right early, including a partnership with AOL. They knew that digital presented a threat to their core business in the long run, but executives were more concerned about the short run. According to
New York Times
reporter James Estrin, when Kodak executives asked when digital could compete with film, Sasson told them it could take twenty years. “When you’re talking to a bunch of corporate guys about 18 to 20 years in the future, when none of those guys will still be in the company, they don’t get too excited about it,” Sasson told Estrin. Sadly, Kodak filed for bankruptcy in 2012.

Big companies have more power than they think. They have scale, they have partners, they understand policy, and often they have global reach. These are all highly valuable assets in the Third Wave (much more so than in the Second), and they will give the world’s biggest corporations the chance to play offense with confidence. Take a lesson from the Wayne Gretzky playbook; he was a great hockey player because he didn’t focus on where the puck was, but where it was going.

Finally, companies would be better positioned if they figured out how to better engage with entrepreneurs so that they can invest in them and own a piece of the action. Some legacy companies have developed internal venture funds, in part to have an early-warning radar system for emerging ideas, some of which may end up leading to profitable partnerships. Others have created a “SWAT” team of people whose only job is to be a connector with startups, serving as a concierge of sorts to help build bridges between executives and entrepreneurs. It’s a way of making sure that clever entrepreneurial ideas find their way to the right person in the company—and that the company has a chance to invest in a future it cannot build on its own.

Ultimately, major corporations should see the Third Wave as both an extraordinary opportunity and an existential threat.
The most successful executives will embrace it with speed and agility. They will break down silos within their company, drive collaboration across divisions, and look beyond their industry for partnerships. And it is from there that they will have the perfect view of once vaunted competitors collapsing under the disruptive forces of Third Wave entrepreneurship.

I
MAGINE IT’S
a beautiful afternoon in late May in Palo Alto. The class of 2040 has just graduated from Stanford University.

Meet Jessica. She’s a second-generation American. She majored in public policy and, like a majority of her classmates, computer science. She’s at the top of her class. Jessica can have any job she wants—and she’s gotten several offers from some of the most innovative Third Wave companies in the world.

And so after she’s dropped off her cap and gown, she packs up her self-driving electric car, gets in, and tells her onboard personal assistant where she’s heading. As the car drives off campus, she starts binge-watching that classic show
Silicon Valley
that she’s heard so much about from her parents. It’s playing on her windshield as the car merges onto the highway. But Jessica isn’t going to San Francisco. She’s headed to New Orleans.
And none of her peers are surprised.

By the time Jessica and her classmates are graduating from college, a quarter century from now, the entrepreneurial landscape of America will look much different than it does today.

Since the First Wave of the Internet, venture capital money in the United States has been geographically concentrated. In 2014, three-quarters of all venture dollars flowed to just three states: California, New York, and Massachusetts. Our most entrepreneurial graduates tend to head to those states, too. They go to follow the money, while the money comes to follow them. Over time this arrangement has perpetuated a virtuous cycle—a financial ecosystem—in which the best innovators and the best investors congregate in just a few places to commercialize the best ideas.

There is nothing wrong with this system. On the contrary, it is the formation of these innovation clusters, and the ecosystems of collaboration that have risen around them, that has helped advance technology. We don’t want this progress to stop. At the same time, because the tech sector has been concentrated in so few areas, most of the economic gains are concentrated, too. It’s what turned the Santa Clara Valley into one of the wealthiest area codes in the world. It’s what produced a vast medical and biotech corridor in Massachusetts, and the jobs and tax revenue that come with it.

Yet, largely because of this concentration, the economic benefits of the growth of the technology companies have not
accrued to many places in the United States. Though consumers in Ohio are just as likely to use smartphones as their counterparts in New York, far fewer are likely to be responsible for the software itself. For most of the First and Second Waves, if an engineer in Nashville wanted to start her own digital company, the only real choice was to move—either to one coast or the other.

This dynamic has caused a brain drain of sorts in the United States. Entrepreneurs are cultivating the skills and creativity to come up with great ideas in the middle of the country. But then they are taking their ideas—the company behind it, the jobs that come with it, and the economic activity that surrounds it—and moving out of town.

But as we enter the Third Wave, this arrangement will change. In fact, it’s already starting. In Durham, North Carolina, for example, seven companies at the American Tobacco Campus’s tech hub had exits totaling $1.5 billion between 2013 and 2015.
¹
Jessica’s journey to New Orleans might be hypothetical, but this future is not. And it’s an illustration of what I’ve referred to as “the rise of the rest.” Journalist Fareed Zakaria coined that phrase to describe the rise of new economies in places like China and India. The same phenomenon is happening within the United States, as regions throughout the country begin to rise.

• • •

Over the next two decades we will see cities that were once marginalized become entrepreneurial powerhouses. We’ll see dozens of startups born in places such as Denver and Kansas City and Austin and Pittsburgh. We’ll see venture firms opening offices in Indianapolis and Minneapolis and Salt Lake City.

We’ll hear stories from places like Buffalo, where a once abandoned area of buildings has become the center of a new tech renaissance. As a reporter for
USA Today
wrote, “As the city slowly emerged from its funk through growth in advanced manufacturing and medical research about 15 years ago, tech and other industries began to land here this year. Today, construction cranes scatter the skyline. Construction is under way for a 1-million-square-foot SolarCity manufacturing center (valued at $1 billion), the addition of 500 IBM jobs and an extension to the University at Buffalo’s medical research facilities.” I’ve invested in two young Buffalo startups myself: Energy Intelligence, which builds technology that harvests energy from motor traffic, and POP Biotechnologies, which uses nanomedicine to develop cancer treatments.

• • •

This geographic diversity is vital to our future. According to the Kauffman Foundation, “New businesses account for nearly all net new job creation,” and “new companies less than one year old have created an average of 1.5 million jobs per year
over the past three decades.”
²
In other words, startups are the engine of our economy. The communities they form, the talent they recruit, the products they make, the jobs they create, and the lives they improve can all be leveraged to transform communities.

For me, the rise of the rest is personal. My family goes back more than one hundred years on the Hawaiian Islands. My grandfather on my mother’s side ran the general store in the town of Hilo. My other grandfather was the treasurer of a sugar plantation on the island of Kauai. Both of my parents went to college (and my dad got a law degree) on the mainland, but then went straight back to Hawaii. But when it was my turn to leave for school on the mainland, I did so knowing I would likely never go back. It wasn’t that I had negative feelings about Hawaii. It was home—and in many ways still is. But I knew I wanted to paint on a bigger canvas, and that reaching for such ambitions wouldn’t be possible from Honolulu. So there’s something personally exciting about knowing that this will soon change for the next generation of entrepreneurs, whether they live in Honolulu or Houston.

I also see the rise of the rest as an investment strategy. Some of the best ideas in the world are being hatched in cities that too few venture capitalists pay attention to. For the past several years, I’ve been getting out of my office, and onto a bus, to see what’s going on in the rest of the country. I’ve traveled to two dozen cities across as many states and seen communities and accelerators thriving in unlikely places. I’ve listened to
pitches from companies few have ever heard of, with ideas I wish I’d had myself. I found Artiphon in Nashville, the maker of a tech-enabled musical instrument that went on to raise the most money in history for its category on Kickstarter and was named one of
Time
magazine’s 25 Best Inventions of 2015. I found Shinola in Detroit. Founder Tom Kartsotis believed Detroit would be a comeback city, and he decided to grow Shinola in a Detroit building that once housed automobile innovation. Hundreds of former autoworkers have been retrained to craft beautiful watches, bicycles, handbags, and notebooks. And Shinola’s “Where American is Made” ethos is being brought to cities around the world, including New York, London, and Washington, DC. We wrote Shinola the largest check in my investment firm’s history. In fact, we’re on track to invest more than $1 billion in rise-of-the-rest cities, and that’s just the beginning.

There are three main reasons I’m confident that major new innovation centers will emerge and flourish around the country. Among them, the most significant is the Third Wave. The rise of the rest and the Third Wave are two different phenomena. But they are colliding—and converging—in self-reinforcing ways.

Most of the industries that are targets for Third Wave entrepreneurs are already clustered throughout the country. And so
for many Third Wave entrepreneurs, there is appeal to putting down roots where industry ecosystems already exist. During the Second Wave, the industry of focus was technology, and so Second Wave entrepreneurs understandably flocked to the place in the country where tech companies and investors had clustered. But during the Third Wave, though products will be tech-enabled, they won’t be tech-centric. They’ll use apps, but the product won’t be an app. And so the benefit derived from being surrounded by the tech world won’t be as high. Instead, being surrounded by experts in the industry you’re trying to disrupt may reap the biggest dividends.

It may make sense, for example, for a company that wants to revolutionize the agricultural industry to settle in the Midwest, where the right supply chains already exist and the culture of farmers is best understood. A company that wants to disrupt the healthcare industry might find that doing it in Nashville or Baltimore, both of which have developed vibrant healthcare sectors, might make more sense than doing it from Palo Alto or New York City. And entrepreneurs pushing the limits of robotics technology may find a welcome home in Pittsburgh, the steel city and manufacturing powerhouse where Carnegie Mellon, a research university with arguably the world’s best robotics program, is located. Of course, many will still head to Silicon Valley, but less so than we’ve experienced in the past. Ultimately, entrepreneurs will want to be in the place where the highest concentration of related expertise is to be found.

Over the coming years, I expect to see lots of tech entrepreneurs and engineers who started in the Bay Area consider relocating in search of industry-specific expertise. And the Third Wave explosion of new kinds of startups won’t just be driven by these entrepreneurial carpetbaggers. We’ll also see industry veterans and local innovators start companies in the rise-of-the-rest regions where they already live, to solve the problems they know and understand.

The Second Wave had many inspiring stories of twenty-something computer coders creating multibillion-dollar companies. The Third Wave will have similar stories, but the founders are less likely to be twenty-something coders and more likely to be thirty-something farmers and factory workers and chefs and artists—people who saw a problem in their own spheres of expertise, then leveraged the skills of others to build great companies.

That was certainly true for Jewel Burks, the founder of Partpic and the winner of our rise-of-the-rest pitch competition in Atlanta. These competitions pit local entrepreneurs against one another for a $100,000 investment prize. Jewel was working in Atlanta for an industrial parts company and noticed that she was frequently receiving calls from upset customers who had mistakenly received the wrong part. Jewel realized that while these customers were looking for specific parts—a bolt for this, a rivet for that—a lot of people didn’t know the actual name or number of the part. So there was
a lot of guesswork, and a lot of frustration when customers didn’t get what they needed.